"Psychological scarring" in the wake of the financial crisis and a growing reluctance to take risks in financial markets can lead to over-pessimism and threatens to delay the economic recovery, a top Bank of England official has warned.

Crisis-induced recessions such as the current downturn are deeper and longer than other economic slumps, and the recovery will be a "bumpy" ride, said Andrew Haldane, executive director for financial stability and a member of the Bank's financial policy committee (FPC). In a paper released on Thursday, he explained that it takes on average up to three years to return to the pre-crisis peak.

He looked to the years following the Great Depression and the UK recession of the early 1990s as potential guides to how we will emerge from today's crisis, concluding that it will be a bumpy ride, with severe knock-on effects on financial markets. Haldane said: "As in 1933, the fear factor is rife in today's financial markets. The prompt has been sovereign debt concerns in parts of Europe and the United States. This is but the latest – and most severe – in a series of waves in sentiment since the onset of the crisis. Risk appetite has yo-yoed."

Today's "risk off" attitude is demonstrated by the recent rise in demand for safe assets such as gold and Swiss francs, the rise in the premium for holding risky assets – yields on Greek, Italian, Spanish and Portuguese government bonds have soared – and the drying up of financial market liquidity.

Haldane said that risk aversion is being exacerbated by behavioural factors, which may be leading to over-pessimism in markets. "Memories of financial disaster are now fresh, as after the Great Depression, causing an over-estimation of the probability of a repeat disaster. In these situations, psychological scarring is likely to result in risk appetite and risk-taking being lower than reality might suggest. Risk will be over-priced. Today, the very disaster myopia that caused the crisis may be retarding the recovery."

Haldane said that risk aversion is being driven by two factors: the debt mountains accumulated by banks, households, companies and governments, and "psychological scarring". While efforts to reduce debts are under way, the process is "far from complete, providing a continuing strong headwind to risk-taking".

Since the crisis, banks have halved their balance sheet leverage. But they are still only midway through their adjustment to new regulatory standards and business models, causing weak expectations of future profits. Reflecting that, bank equity prices are back at 1998 levels.

Among the G7 countries, government debt to GDP ratios are set to hit 100% this year.

New policy approaches might be needed to mitigate the "fear factor", speed up balance sheet repair and stimulate risk-taking. He turns to the role of the UK's new body, the FPC, which is charged with protecting the financial system from future risks and ensuring the system is taking sufficient risk to keep credit flowing. "The FPC, like the monetary policy committee, needs to act symmetrically in response to these developments. Its job is to cushion the fall as well as arrest the rise in credit and debt."

Haldane suggests a number of ways in which this can be achieved. Raising of capital by banks, as recommended by the FPC in June, is one way. Communicating about the possible over-pricing of risk is another. Recommending changes in regulation to lean against the wind would be a third. He concluded: "As in the 1930s, macro-prudential policy may have a role to play in shouldering the heavy burden of damaged balance sheets and diminished risk appetites."